Independent Directors – Not good enough

Try this one. Ask any independent director of any company, the following 5 questions.

1. What was the exact turnover and profits of your company for the last quarter ?
2. What is the annual turnover of your five largest brands/geographies/service lines – whatever ?
3. Who is the Financial Controller of your company ?
4. How many employees, to the nearest thousand, does your company have ?
5. What is your market share in your most important market and what is the share of your most important competitor ?

I am willing to bet that most of them would fail in this test.

This post argues that independence of a director is necessary, but not sufficient, to ensure good corporate governance. A more important criteria is left out, or mistakenly applied – effectiveness.

What sort of people become independent directors these days. Four broad categories of people – chairmen or senior executives of other companies, retired business leaders, academicians and former politicians or bureaucrats. All four, in my opinion are not automatically suited to perform the role of an independent director.

What is the role of an independent director anyway ? My submission is that they are NOT there to contribute to, or drive, the strategy of the company (that’s the job of the full time management of the company). They are there to ensure good corporate governance and to ensure that the rights of all the stakeholders are protected. Period.

The first group – chairmen or senior executives of other companies have no time. Running a company is more than a full time job. They cannot do justice to the intensity of what is required from an independent director. They come for board meetings, certainly contribute to strategy with their vast knowledge and experience, but cannot give the attention and time required for corporate governance.

For retired business leaders, the position is a perquisite rather than a job. Isn’t this what business leaders normally do after retirement ; to be able to say that they serve on the boards of 10 companies. They can devote the time, but usually don’t. They also don’t want confrontation. They would rather have peace and quiet, attend board meetings, make a point or two and go away.

Academicians suffer from a similar problem as serving business leaders. Lack of time. Add to that , all too frequently, incompetence in applying theory to practice. To many, corporate directorships are a big ego trip and a way of ensuring consultancy assignments. They also have not had practical exposure to the running of a business to smell and detect lacunae in governance.

I won’t even comment on the suitability of retired politicians or bureaucrats to do the job.

I’m pretty sure that most independent directors skim through the board papers on their flight to the board meeting. Few have applied their mind to the issues at hand, unless a crisis hits the company. They sit in Board meetings and react to what is presented. No wonder they are ineffective.

What, I believe is needed, are professional independent directors. That should be all they do for a living. Perhaps even organizations in the business of independent directorships. Perhaps even a professional body, a la, CPAs. They would need to spend at least one day in a week with the company. They should travel to company operations. They should build direct lines of communication with key people in the organization. They should have sufficient accounting training to detect frauds or impropriety. They should be able to ensure adequate whistle blowing mechanisms. They should devote their attention fully to governance – not business strategy. They should be paid virtually executive salaries. And, of course, they should be independent. Perhaps then, they will be truly effective .